Technical talk: Sentiment review

Secular liquidity, a.k.a. buying power, as seen through the eyes of current individual investor allocations relative to historical norms, shows ample liquidity on the sidelines and in cash. Current levels approximate liquidity seen at the 1990 and 2002 lows, which continues to suggest that there is probably enough liquidity to keep moving stocks higher in this snapback/bounce.

When combined with incredibly negative investor expectations, no alternative for return in fixed income, and the principles of mean reversion at work and moving higher with some volatility, pullbacks (possible retest of lows) and consolidation are a reasonable expectation still. Remember, continue to watch how stocks act on bad news. When they rally on bad news, not only does it suggest investors are looking over the valley, but it also suggests liquidity is more than sufficient to absorb the selling.

Granted, after a 25% rally off the lows and stiff resistance in front of us near 850 (S&P 500), it won’t be an easy climb. The reason it is never an easy climb off the lows is because at every level higher on an index, pockets of under-water investors (i.e. losing money positions) can sell at break-even prices. Nonetheless these indicators suggest we can move higher over time. We will continue to monitor for changes that would suggest this argument no longer holds true.

Shorter-term sentiment measures such as Put/Call ratios and AAII Bearish Sentiment Survey, which were decidedly bullish for the market several weeks ago via their bearish readings, have moderated but are not yet at levels that would be construed as a negative.